Europe carries less weight as Euro loses steam against dollar

The currencies are equal in value for the first time since Euro was introduced in 1999

By Jon Van Housen and Mariella Radaelli

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Published: Tue 19 Jul 2022, 11:02 PM

After more than two decades the dollar and the Euro have reached parity, meaning they are equal in value for the first time since the euro was introduced in 1999, other than for a brief period right after the common currency was first minted.

It is another sign that the times are a-changin’ in Europe as the continent faces a perfect storm of inflation, armed conflict, nations with high levels of debt, a stubborn pandemic and a looming energy shortage.

Now the dollar exchange rate is virtually one-to-one, but for a generation a high-priced euro reflected the refinement of Europe. It seemed a currency rightfully burnished to represent countries that brought forth Western civilization, a region that generated breakthroughs in science, medicine, art and thought. It seemed only fitting that Europe’s money would carry more weight.

And after some initial teething issues it did exactly that, at times trading at 1.6 – meaning it would take more than a dollar and a half to get a shiny euro.

In recent years it has mostly traded between 1.1 and 1.2. Those numbers after the decimal point might not look like much, but 10 or 20 per cent across the Eurozone – together the world's largest economy – is huge.

The strong Euro meant that raw materials purchased overseas were relatively affordable for countries in the Eurozone. The steel for BMW luxury cars, the cotton and silk for Dolce & Gabbana fashions, the rubber for Michelin tires – all could be more affordably sourced.

Of course a strong euro resulted in finished products that when exported were more expensive than those made in other places, but then consumers accepted that elegant Europe could command higher prices.

The strong Euro also meant that oil and other forms of energy could be acquired without devastating pain, allowing Europe to levy high taxes at the gas pump.

Almost always priced in dollars, oil is more expensive for Europe today as are most foreign raw materials. Already high inflation has been supercharged by a weaker currency.

What Euro parity means over the long term – if it lasts over the long term – is now widely discussed, but the result would certainly be altered consumer behavior and further stressed national economies

In the short term, the weaker Euro seems to offer many benefits to Europe. Its goods should be less costly to foreign buyers, so international sales should surge. And the crucial tourism sector should boom as Americans and other foreigners rush to benefit from the dramatically weaker euro.

Feeling locked up for more than two years, Americans eager to travel have surveyed the horizon and discovered that a flight to Paris might be as the same price as a journey to Houston.

But the two-year pandemic had already created supply chain issues in the manufacturing sector and tourist-related businesses were struggling to cope with the onslaught as pent-up demand was unleashed in what some called “revenge travel”.

Also impeding the travel sector is a severe staff shortage. Workers are unwilling to return from remote work to face unmasked crowds.

The summer has been filled with hellish travel stories of flight delays and cancellations, lost baggage and pricey or booked-out hotels. The average international flight costs 26 percent more than in 2019.

In mid-July London’s Heathrow airport even asked airlines to halt ticket sales, saying it would only allow 100,000 passengers each day until Sept. 11. The world’s busiest airport, Heathrow serves as a critical transit point for travel to Europe. Back in early June when the UK was celebrating the Queen’s Platinum Jubilee weekend the airport was already struggling with widespread travel snarls.

As the impact of Euro parity is studied and felt, why it came to pass is also subject of hot debate. The more technically inclined argue over thresholds, interest rates, debt and central bank monetary policies. Noted economist Paul Krugman cites the late MIT professor Rudiger Dornbusch, who insisted that a country’s currency tends to settle at the level at which its industry is competitive on world markets.

If so, that means the Euro and European goods were overpriced under recent circumstances, an assertion easy to agree with. Again, leading civilization’s trends, it seems Europe might have arrived at a post-industrial landscape first. Can it no longer sustainably feed spiraling production and pricing?

It appears that Germany made the wrong bet when it decided to rely on cheap gas from Russia and exports to China. Growth in its auto sector in recent years was largely driven by the vast number of Chinese consumers who could buy a car for the first time.

But conflict and Covid have rattled both of those pillars, leaving Germany and the legacy of former Chancellor Angela Merkel vulnerable.

For now it seems both Americans and Europeans are determined to enjoy the summer and attempt business as usual, at least as much as possible, and face the music this autumn.

Just what that tune will be could be so complex it will be difficult to play.  And it’s likely to be a melody the likes of which we have not heard in recent times.

Jon Van Housen and Mariella Radaelli are international veteran journalists based in Italy

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